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Structured Products – Maturing Nicely

Thomas Hughes, editor of Structured Products Review, is heartened by recent out-turns

 

For some people, structured products still seem to remain something of an enigma – and there certainly do appear to be a number of misconceptions that remain in existence.  One of these myths is that structured products ‘do not benefit the investor’.  But do the facts really support this idea?

Well, we could show you returns that structured products have achieved over the last one, five or even ten years – but, in the interests of brevity, let’s just consider the returns that have been generated by the 44 IFA-distributed structured products that actually matured in January 2014.  While it is unlikely that these results will ever be replicated exactly in any other month, they are by no means atypical.

 

Big Winners

The first product worth highlighting is the Keydata Dynamic Growth Plan Plus 2, which matured delivering an 80% gain for investors against an 11.6% rise in the FTSE 100, the index to which it was linked. Not bad.

Launched in January 2008, this product offered growth at 10 times the rise in the index, subject to a maximum return of 80%.  Investors would only have lost money if, at the end of the investment term, the FTSE 100 was down more than 50% from the start of the investment (the strike level), which would have meant the index falling to below 2934.50 – a level the index has not been at since 1997! – or if the counterparty, JP Morgan, failed.  

It was, of course, up to the individual to decide on the level of risk that they felt this represented when the investment was first made.  But in my opinion this product has returned an impressive gain without exposing the investor to the same risks they would have experienced by investing directly into equities.

The maturity is on a par with the returns of the Keydata Dynamic Growth Plan 18 that matured in August 2013, returning an impressive 12 times the rise in the FTSE 100 – equating to a 72% return on the 6.3% rise in the index over the six-year term of the investment. 

The Keydata Dynamic Growth Plan Plus 2 is, however, just one of the highlights of the sector.  Other top performers that matured in January 2014 included Investec’s FTSE 100 Enhanced Kick-Out Plan 33 – Option 1, which matured with a 15.5% gain after one year; Morgan Stanley’s FTSE Kick Out Growth Plan 8, which returned 50% after three years; and the Barclays 5-year Super Tracker (November 2008 edition) that returned 100% gain when it matured on 20 January 2014.  None of these investments would have given rise to a loss unless the FTSE 100 fell more than 50% or the relevant bank failed.

 

A Rare Loser

The only product that matured with a loss in January was the Dawnay Day Quantum Protected Commodities Dynamo II, which after 5.5 years produced a 10% loss (the maximum possible without Counterparty failure).  The next worst was the Abbey Capital Guaranteed Residential Property Bond (Issue 2) which matured returning investors’ capital only after a long 7 ½ year term.  Only two other products matured with no gain: one was linked to the Asian markets and the second was another Dawnay Day product linked to a basket of commodities.

As we know with hindsight, the Keydata Dynamic Growth Plan Plus 2 was launched before the Financial Crisis.  However, like many similar structured products, it still protected investors’ capital through one of the worst periods in investment history – including the failure of Keydata as a company – demonstrating the remarkable value and stability that structured products can bring to an investment portfolio. 

While past performance is not a guide to future returns, the maturities that have occurred in January 2014 demonstrate unequivocally that structured products have a place in investors’ portfolios.  As contracts, they are bound to deliver exactly what the terms dictate on a set date, allowing them to be used to balance and hedge against the mutual funds and other potentially more volatile elements of a portfolio.  

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